Imagine waking up one morning to find all your bills paid, your savings account growing, and your investments thriving—all without lifting a finger. Sounds like a dream, right?
With financial automation, this dream can become a reality. Financial automation allows you to set up recurring payments and transfers between accounts to handle routine financial tasks effortlessly. But what exactly does it mean and can someone set this up? In this blog post, we'll dive into the pros and cons of automating your finances, explain key financial terms, and explore research-backed strategies to help you manage your money like a pro. Let's get started!
The Benefits of Financial Automation
Financial automation offers several advantages that can help you streamline your financial management and achieve your financial goals more easily. Here are some of the key benefits, backed by research studies and real-world examples.
Timely Bill Payments and Avoiding Late Fees
One of the biggest advantages of financial automation is the ability to set up automatic bill payments, ensuring that your bills are paid on time each month. This eliminates the risk of incurring late fees or damaging your credit score due to missed or late payments. According to a recent study, 36% of adults in the US struggle to pay their bills on time. Automation helps lower this risk and contributes to a positive payment history, an important factor in determining your credit score.
When you automate your finances, you also spend less time looking at your budgeting spreadsheet.
Consistent Savings and Investment Contributions
Another benefit of financial automation is the ability to set up automatic transfers to savings or investment accounts. By automating contributions, you can consistently build your savings or investment portfolio without the need for manual work. A survey by Bankrate revealed that 25% of people in the US would use a credit card instead of emergency savings to pay off a $1,000 bill. And this percentage of people has only increased since 2014.
Automation aligns with the "pay yourself first" philosophy, where a portion of your income is automatically set aside for future goals before you have the chance to spend it. It may be hard to set up an exact dollar amount based on your own circumstances however, we recommend that you try to set aside 5-10% of your paycheck (the amount before taxes).
The Downsides of Financial Automation
Despite its advantages, financial automation isn't without its drawbacks. Understanding the potential pitfalls can help you make a more informed decision about whether automation is right for you, and what specific bills and accounts you want to automate.
Risk of Overdrafts and Insufficient Funds
One potential downside of financial automation is the risk of overdrafts or insufficient funds if automated payments or transfers are scheduled when your account balance is low. This can result in overdraft fees, insufficient funds fees, or declined transactions. To lower this risk, it's important to monitor your account balance and schedule automated transactions to align with your income and cash flow.
You don’t need to automate every transaction all at once. Start off with your smallest bills first and work your way up. Afterward, set up automatic transfers to your savings and retirement accounts. And always leave a little bit of buffer room in your main checking account just in case you need to make a manual transfer or payment.
Reduced Visibility with Finances
Automating your finances can lead to reduced visibility of your financial situation, as you may be less likely to review bank statements, track spending, or adjust your budget during emergencies. To avoid this, it's important to regularly review your accounts, monitor your financial progress, and make adjustments as needed to stay on track with your goals. The goal of automating your finances is to make your life easier, but you should be checking your budget monthly.
Key Features to Look for in Financial Automation Tools
Selecting the right financial automation tools can enhance the benefits of automation while reducing potential downsides. Platforms like Mint, YNAB (You Need A Budget), and Acorns offer automation features that can help you succeed. Here are some key features to look for when choosing automation tools.
Flexibility and Customization
Flexibility is a vital feature in financial automation tools, allowing you to customize payment dates, amounts, and frequencies to fit your unique financial situation. The ability to adjust automated transactions helps you manage cash flow and avoid issues like overdrafts.
Real-Time Alerts and Notifications
Real-time alerts and notifications keep you informed about your financial transactions, balances, and any unusual activity. These alerts can help you stay engaged with your finances and take prompt action if any issues arise. Many fintech platforms, such as Mint and YNAB, offer customizable alerts and notifications to keep you notified.
Integration with Other Tools and Apps
Integration with other financial tools, such as budgeting apps, investment platforms, and credit monitoring services, can provide a comprehensive view of your financial health. Integrated tools can help you make more informed decisions and track your progress towards financial goals. For example, Acorns integrates investment and saving features, allowing you to round up your purchases and automatically invest the spare change.
Tips for Successfully Automating Your Finances
If you decide to automate your finances, here are some tips to help you succeed, along with the latest developments in financial automation:
Monitor Your Account Balances Regularly
Regularly monitor your account balances to ensure you have sufficient funds for automated transactions. Consider scheduling payments after your paycheck is deposited to avoid overdrafts. Some banks, like Chime, offer features like SpotMe, which provides overdraft protection without fees, making automation even safer.
Set Goals and Review Progress
Set clear financial goals and regularly review your progress towards achieving them. Automated savings and investment contributions can help you stay on track, but it's essential to evaluate your financial situation periodically. Innovative apps like Qapital allow you to set and automate savings goals based on personalized rules and triggers.
Leverage Tech to Grow Your Wealth
Use technology, such as mobile banking apps and financial management platforms, to stay informed about your financial activity. Take advantage of alerts, notifications, and reporting features to gain insights into your finances. The rise of open banking and API integrations, which are technical means of connecting different financial services together, allows for seamless connectivity between financial tools, enhancing your ability to stay informed.
Automating your finances can be a powerful way to simplify your financial management, achieve your goals, and reduce financial stress. By understanding the pros and cons, choosing the right tools with cutting-edge features, and implementing best practices, you can make financial automation work for you. Remember to stay engaged with your finances, monitor your progress, and make adjustments as needed to ensure a bright financial future.